I was going to discuss some thoughts on Web 2.0 profitability, and I think some readers on this blog will be familiar with my disdain for “get the eyeballs, revenues will come” mindset (have been hurt once on that!). Am beginning to hear more and more of that again… Some entrepreneurs point to Adsense as the default business model, but thats probably not enough — do the math, the numbers are too small.
So what could be the model? One that I am beginning to develop some conviction for is towards experiences so far in monetizing high affinity communities. In an offline model, we already have experience in monetizing a Harley Davidson club, or Rotary, and so on. Some thoughts basis that:
1) The key to these communities is not the size (the key to “enabling technologies”, such as tagging, will be size), but sharpness.
2) Once you have sharpely focussed communities, what you sell on top of them has to be much higher value than adwords. Amazon’s expected “Productsense” model could be one, as also the ability to “click-to-talk” enabled by VoIP providers. Affinity driven products and services would be the key, and relevance will need to move far beyond adsense.
3) Think of this — if you had a community of Harley fans online, what would you sell to them? and how can you now take that example, and generalize the technology? I think seeds of those enabling technologies are beginning to emerge today.
4) Due to high concentration of value, the enabling businesses will not all be automated — especially, the part where “relevance” gets captured (the hosting part may be automated, as a contrast). Tagging is an example.
5) I still think there will be a mix of “interest-centric” and “user-centric” communities, and hence the ability to “follow a user” across interests could be another possibility — this is same as trying to derive user profile from content being browsed. The current intent-based-paradigm will get far sharper, and/or evolve into user-based-paradigm.
6) High affinity should imply lower customer acquisition costs, though that by itself might not be an exit driver.
So the problem to be solved is
a) What creates high affinity communities on the web (I do not think the early experiments in Web 2.0, such as myspace, are the answer)
b) How does one maximize value per member with sharpely focussed communities
I dont know whether I am catching up here, or crystal gazing 🙂 so any comments are welcome!
Alok
- Promoters or Entrepreneurs – A choice for Private Equity players - August 3, 2019
- Startup Marathon Mindset - March 25, 2019
- What’s your Customer Culture? - March 4, 2019
Hi Alok
Wonderful post. Isn’t it strange that most people get carried away so easily while discussing Web-based companies without factoring in their profitability?
I agree that size of an online community is not always a realistic yardstick of potential revenues. The quality and coinciding of interests is critical.
For instance, consider a sharply focused group of Carnatic music fans. There is a high probability that these guys share a common background, interests, weaknesses, worldview, et al. How does the entrepreneur exploit this? Or, working in reverse, knowing that a group of Carnatic music fans are bound to have a great deal in common, how does he go about setting up an online (Web 2.0, if you want it that way) joint where they can jam up (he can sell them all they want once enough people throng the place)?
Startups need to think of the big picture instead of bandying new age terms and concepts (like Web 2.0) just to sucker VCs.
As for the build-to-flip model, I agree with Vivek. Why not give it a shot? Everyone knows Yahoo and Google are on the prowl, and have deep pockets. It doesn’t hurt to try and catch their attention. Who knows when they’ll give a call? (***sheepish grin begins*** my startup’s already busy working on it).
i always believed that advertisement is not a very scalable & predictable revenue model . apart from that some kind of business are not fit for this model. if your web 2.0 idea is about blogging,social networking, sharing etc than it may work if you can get enough eyeballs but the moment you plunge with some serious business activity you need a alternate revnue stream .
My Fav example is 37signals.com .
this company is diffrent in two ways, first its primary source of revenue is through subscription ofits services . as they are in a serious business application arena so nobody like to see a advertisement while he is in the middle of something serious .
second this company is out of very few web 2.0 companies which is not a victim of Eternal Beta syndrome . for some strange reasons putting a Beta next to your service make it hot these days .
Adertisement are good model for Portals and i think there is not much space for portal now . I did an analysis of problems with Adv. revenue model on my blog . you cab read it here
http://knowprashant.blogspot.com/2006/03/problems-with-advertisement-as-revenue.html
Prashant
Found some interesting ideas on this post.
Reducing guilt is the killer app
=====================
One of the things that made me happiest about this week’s ETech conference was the number of people I talked to who were creating companies (yes, some decidedly web two-dot-oh-ish) around products or services that would reduce guilt. Not as their main feature, but as a side effect. A natural consequence of what the software or service or system does for you.
read more:
http://headrush.typepad.com/creating_passionate_users/2006/03/reducing_guilt_.html
well, I am not sure how long the “build to flip” business model will last, but might not be bad to give it a try.
the barriers to entry/startup costs might look low, but thats only true on the technology piece — the critical value determinant is the community piece, and thats not easy to build.
another way of looking at it is that today there is a market for acquisition of companies that are building features (instead of full products, let alone businesses) — and acquirers will put together those features and create real businesses (hopefully). Perhaps the most significant experiment in outsourced product development, where developers of individual parts capture value for that part? Is it to stay? I think unlikely…
what about the “build to flip” business model ? the barrier to entry and startup costs of Web2.0 companies are so low that you really have to be crazy not to try to cash in when someone offers to buy you out.